Aussie.Com.

• Author: HALE, DAVID D.

How to save Australia's sinking dollar: Throw another hi-tech firm on the barbie.

One of the great surprises in the world financial markets this year has been the decision of the Federal Reserve to raise interest rates in the face of a declining Australian dollar. In the modern era, movements of the Australian dollar have usually been a very reliable indicator of American monetary policy. As the value of the A-dollar has a very high correlation with commodity price fluctuations, the Federal Reserve has tended to raise interest rates during periods when the A-dollar was appreciating and eased rates when the A-dollar was declining.

Why has Australia's currency depreciated at a time when the world economy and commodity prices are so robust that the Federal Reserve is likely to raise interest rates several times? There are many potential explanations, but the dominant one appears to be investor perceptions that the A-dollar has become an old-economy currency. The Australian stock market offers only modest exposure to the information technology sector, and so it is difficult for the Australian market to attract global portfolio capital flows at a time when investors are obsessed with the IT sector.

The composition of the Australian equity market capitalization provides useful insights into this problem. The sectors with the largest weightings in the market are media (18.7 percent), banks (18.3 percent), resources (14.7 percent), telecommunications (13.9 percent), insurance (5.1 percent), property (4.8 percent) and retail (3.2 percent). The technology component of the market is tiny. Software has a market weigh of 1.2 percent, while the internet sector is at 0.2 percent. In some countries, investors regard their media and telecom companies as plays on information technology, but Australia's companies are not well positioned to play a supportive role for the local currency. The largest media company is News Corp, which is traded in New York and London. As a result, investors do not have to bid for Australian dollars in order to purchase the shares. Telstra is trying to evolve into a major force in the IT sector, but its profit margins are under pressure from increasing competition while its liquidity is constrained by a high level of government ownership.

There has been a tremendous upsurge of flotations of internet and software companies in Australia during the past two years, but most of these companies still have very small market...